A microcontroller is a single-chip computer containing a processor, memory, and input/output peripherals. It accepts input, processes it based on stored instructions, and outputs results. Microcontrollers are used in embedded systems and have characteristics like on-chip memory and programmability. They work by having a CPU process input data through pins based on sequential logic and a clock signal. Microcontrollers contain elements like a CPU for arithmetic/logical operations, RAM for data storage, ROM for storing instructions, I/O pins for input/output, and a clock.